What Jurors Learned at the SBF Trial on Friday
Photograph Source: MIT Bitcoin Club – CC BY 3.0
The defense began its case in federal court in Manhattan on Friday in the trial of Sam Bankman-Fried, accused fraudster and money-launderer whose cryptocurrency exchange, FTX, was, not so long ago, exalted by great swaths of the press, young crypto enthusiasts, Democratic politicians fattened by campaign donations, Tom Brady, Michael Lewis (whose book Going Infinite was released the day the trial started), NBA fans packing the then-FTX Arena to see the Miami Heat, Major League Baseball slapping the FTX logo on umpire uniforms, nonprofits agog in the aura of Bankman-Fried’s cash and claims to “effective altruism,” and others who made gobs of money only to lose it when crypto, and FTX, and its sister trading firm, Alameda Research, collapsed last year.
Since October 3, jurors have heard the former friends, colleagues and in one case business associate and lover testify for the prosecution. All of the principals, former CEO of Alameda and onetime girlfriend Caroline Ellison, co-founder of FTX Gary Wang and head FTX engineer Nishad Singh, have detailed ways that FTX customer deposits were secretly funneled into Alameda, which had been granted elastic borrowing privileges—into the billions of dollars, with little or no collateral—and which then spent, transferred or gambled this customer money away. They testified that they participated in the theft or its concealment at the direction of Bankman-Fried, and have pleaded guilty to fraud and conspiracy charges.
With his friends cooperating in anticipation of lighter sentences, his former admirers having fled into the night from the taint of scandal, and his parents (longtime Stanford Law School professors of ethics and tax law) in hot water themselves, Bankman-Fried is the entire case for the defense.
He is expected to complete his direct testimony and then face cross-examination on Monday. Here, in capsule, is what jurors have heard so far by way of defense:
He’d worn shorts because they were comfortable.
He’d grown his hair long because he was lazy.
He worked 12 to 22 hours a day.
He took a day off every month or two.
He’s trying to break the habit of using ‘we’ to mean ‘I’.
Sometimes he forgets.
He used to sit in front of six computer screens with multiple sub-screens all day.
He liked it that way so he could pay attention to everything.
He couldn’t pay attention to everything.
He tried.
He made “a number of small mistakes and some large mistakes”.
He got thousands of emails every day.
He was engaging in a few hundred Signal channels every day.
He’s introverted.
He never meant to be the public face of FTX.
It just happened.
An “accident”.
So much just happened.
+++
He’d founded Alameda in 2018 and was its CEO until 2021.
He’s never been good with names so he picked the California county where he and his cohorts, “trusted friends”, lived and worked in an Airbnb.
Golly, it was crowded.
So many 25-year-olds.
So many cardboard boxes.
In 2019 he started FTX.
He moved corporate HQ to Hong Kong.
That happened sort of by “accident” too.
He’d attended a conference there.
Hong Kong was great; he had more meaningful conversations than he’d ever had in California.
“We had no idea at all” about how to create a crypto exchange.
They had some ideas, like cross-margining, omnibus wallets, claw-backs aka “socialized loss” to cover liabilities.
He thought there was a 20 percent chance of success.
FTX was a margin exchange.
Could he explain to the jurors how that works?
“Yup.”
Sort of like “a mortgage”.
He created teams to deal with various aspects of the business.
So many teams.
He never created a risk management team.
He wishes he had now.
That was one of the large mistakes.
He was very interested in managing risk.
+++
Alameda was allowed to trade on the exchange.
And to borrow from it.
And to take money directly from customers to invest on FTX.
And to loan money to him to make political or charitable donations.
Some of those loans were documented; others…
“Maybe not all.”
So much money (and pseudo money) was moving.
Eventually, “I wasn’t entirely sure what was happening”.
He had allowed Gary and Nishad “to make decisions without consulting me”.
He was so busy.
“Yup.”
How many times had he gone to Congress to talk about regulation?
He had never expected this level of growth.
At the start, he’d “had no idea how to get customers” for FTX.
Word of mouth, it all just happened.
He knew absolutely nothing about marketing.
He liked the idea of branding with major league sports.
People remember arena names.
It cost a lot, but he did the calculations and saw only upside.
He’s only kind of into sports.
He was at the Super Bowl in Los Angeles in 2022.
Here’s a picture of him with celebrities.
Another happenstance.
They invited him into their box.
He had just been wandering around SoFi Stadium.
+++
By 2022, FTX was doing $10-$15 billion a day in crypto trades.
Bankman-Fried liked the idea of the company’s 2021 revenue being $1 billion.
One of his lieutenants told him it wasn’t quite that high.
He asked for a recalculation, and the lieutenant managed to justify the boss’s figure.
A nice “round number”, a billion.
Bankman-Fried and the others had decamped to the Bahamas by then.
“I had come to the belief that I could have an impact in the world.”
He’d hired consultants on politics, government, charitable giving.
He never did hire a chief risk officer.
FTX didn’t have a dedicated insurance fund.
Its automated risk engine was prone to SNAFU.
So many orders, so much data, so much strain on the computers.
Wonk-wonk.
Earlier there had been a scare.
What if the risk engine had erroneously liquidated Alameda’s account?
“It would have disastrous consequences”.
Do “something” about it, he told Gary and Nishad.
They allowed Alameda to go negative, with a virtually unlimited line of credit.
He didn’t know.
He was always interested in protecting customer accounts.
He was still involved in risk management at Alameda.
From late 2021 he was telling Caroline that Alameda had to get into hedging, going short as well as long, to handle risk.
How many times he told her …
If only she’d listened.
Crypto tanked in the spring and summer of 2022.
He was “very surprised” when he heard Alameda had a liability of more than $8 billion.
He thought the company would still be okay losing $8 billion.
Then he didn’t.
Then he said, “I think it might be time for Alameda to shut down.”
His friends said, No.
He didn’t close Alameda.
Damned friends.
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